Business Owners: Do You Know What Your Business Is Worth?
12 December 2022: Business Owners: Do You Know What Your Business Is Worth?
If you own a business, do you have any idea what it’s worth? If most studies are any indication, probably not.
According to a recent poll conducted by M&T Bank, a Buffalo, NY-based bank holding company with nearly 800 branches throughout the Northeast and Mid-Atlantic regions of the U.S., an incredible 98% of the small business owners throughout the bank’s geographic area of operations didn’t have a clue.
Given their business is almost certainly their most valuable asset, this is astonishing!
Nearly everybody who owns a home has a pretty good idea of its value. And this includes business owners!
If you have an investment account, you know its approximate worth on any given day. If you invest in real estate, you have a pretty accurate estimation of what each parcel or building is worth. Heck, whether it’s a Ford or a Ferrari, you probably know what your car’s worth! It’s inconceivable that the owner of a business would not want to know that business’ approximate value at all times.
Know Your Business’ Value
For many reasons, knowing what your business is worth is extremely important even to the business’ day-to-day operations. Those reasons include the possibility of an eager buyer showing up unannounced, the issuance of stock options to keep key employees loyal and focused, succession planning, tax and estate planning, raising capital for growth, implementing a buy-sell agreement, insurance needs and obtaining business funding to list a few.
We offer a comprehensive coaching program – both group coaching in our Brokers’ Roundtable community as well as one-on-one coaching – tailored to Realtors, business owners , buyers and anyone interested in valuing, buying or selling a business.
If you’d like to learn more, email me at jo*@Wo*******************.com
If the business has more than one owner, knowing the valuation provides each owner with a precise idea of where on the value scale the business is at any given point in time which can not only help the owners see where they are on their path to an eventual exit but also to provide the basic element for a amicable resolution should one or more of the partners wish to leave the business. In the latter case, not knowing what the business is worth when one of the owners wants out, is pretty much a guaranty that a nasty battle will erupt between partners – and that battle will very likely spill over into the business’ operations, a condition that will almost certainly negatively impact value.
Need some concrete reasons to illustrate the critical importance of knowing what your business is worth? Well, here are three of them.
A Small Manufacturer
One of our clients was a small East Coast manufacturer of musical instruments and accessories. When a sudden and unexpected opportunity arose for them to acquire a similarly-sized business in a field that complimented their existing business, they knew they needed to act quickly.
They approached their banker who immediately asked to see not only their current financials and the financials of the target business but also asked for a valuation of their existing business. Fortunately, we had been doing periodic valuations for them over the previous several years and they were able to provide a reasonably current business valuation that supported their request for the acquisition funding.
This is an easy illustration of the importance of knowing a business’ value when expansion or acquisition capital is required. Knowing what their business was worth enabled them to take advantage of a unique and momentary opportunity.
A Service Provider
Another client of ours was a lower middle market service provider in the healthcare industry. It was owned by five individuals, doing about $8 million in revenue and growing rapidly. But no one had any idea how much it was worth or how much that value might be changing as the business expended. In a move that proved quite prescient, the owners contacted us to discuss how we might help them prepare for an eventual sale to an even larger company a few years in the future.
One of the first things we noticed was that, though there were five partners, there was no mechanism for any partner to exit. We explained that partnerships break up all the time and we could see that there was already some friction among the existing owners.
But more important, there was no provision in any of the company documents that anticipated what would happen to the business if something happened to one or more of the owners.
The thought stunned everyone at the table. After a momentary pause, we explained that, without the appropriate insurance, the surviving partners would automatically have new partners; the heirs of the deceased partners, none of whom where known to the surviving partners nor knew anything about the business. Before that meeting ended we were tasked with developing a buy/sell agreement that detailed not only a mechanism to protect the company if the unthinkable occurred but also provided a way for any of the partners to exit at any time.
The mechanism that would protect the business in the event of the unthinkable had to be funded with life insurance on each of the partners whereby the insurance proceeds, in the event of a partner’s death, would be paid to the company. This would allow the company to buy the interests of the deceased partner from that partner’s estate. The key point here is that there needed to be enough insurance for such a buyout. The only way to determine what was “enough” was to know what the business was worth.
As it happened, about five years later, the unthinkable happened; one of the partners died suddenly. Fortunately, as a result of that earlier meeting, the owners asked us to perform an annual valuation of their business. With that valuation, they were able to keep adequate insurance on place. When disaster struck, their business was protected.
A Personal Experience
This final example is one that some of you longtime readers may be familiar with.
In the early ’90s, I started a wholesale/distribution business. In a couple of years’ time, our annual sales broke $1 million and we were growing fairly rapidly.
Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.
Out of nowhere, an investment group showed up to say they wanted to buy the business. My response was that the business was not for sale. Their response, of course, was that everything was for sale. And in the end, they were proven correct.
Did I know what the value of my business was? I didn’t have a clue! In fact, like most business owners, I had no idea how to value that business – or any business, for that matter.
It doesn’t matter how unlikely you think the possibility of an unexpected suitor for your business is, it’s real. And if you have no idea what your business is worth, you’ll have no idea how to react.
The Bottom Line
The three stories above are all real-life events either from our client files or, in the case of the last one, from my own personal experience. These are everyday events in business.
But even if you’re never approached by a buyer; never want to give your valuable employees equity; never need to raise capital; never need to borrow for expansion; never engage in any tax or estate planning; your business will eventually change hands either voluntarily and at the time of your choosing or involuntarily if some calamity were to happen.
Far too many business owners think about value only when they’re ready to sell – when it’s too late to do much about it. Valuing your business regularly will provide guidance while you’re building your business, more control should some misfortune befall you or the business and some certainty about the results of a sale as it pertains to your life post-closing. It will also help you see weak spots, opportunities to increase value and make improvements to the business that will raise its value over time.
Remember our long-time tag line: “Every business that doesn’t fail will be sold; Every one.” That includes yours.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at jo*@Wo*******************.com.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
We’ve been contacted by a relatively young investment group looking for opportunities in the business servicces, tech/telecom, health/wellness and consumer/retail verticals with between $2 million and $20 million in discretionary earnings/EBITDA. U.S.-based preferred.
If any of you know of something that might fit, please let me know.
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 500 in the world. He can be reached at jo*@Wo*******************.com